History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today.
Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.
A simple comparison between conditions then and now suggests the Fed’s explicit desire to “normalise” financial conditions may come from a desire to avoid repeating the experiences of the late 1990s. Whether policymakers are right to prioritise the real economic data, which tells us what’s already happened, over the action in the financial markets, which tends to affect what will happen, is anyone’s guess. Read more